Jon Excell

The wrong type of economic growth?

If I had a penny for every time a government minister has talked about the importance of “rebalancing the economy” there wouldn’t have been any need for austerity measures; I could have bailed out Britain myself.

It would, of course, take a bit more than that. But it’s certainly true that ever since the earliest days of the financial crisis politicians of all stripes have frequently talked up the need to reduce our dependence on the fickle world of finance and shape a more sustainable, broad-based economy with manufacturing and engineering at its heart.

Politicians of all parties regularly talk of the need to rebalance the economy

Back in 2008 Peter Mandelson - Labour’s business secretary – called for “less financial engineering and more real engineering”. Shortly after taking office in May 2010 David Cameron continued the theme, pledging to rebalance an economy that had become too reliant on financial services. And the mantra can still be heard today. Talking just last week at the Davos world economic forum Cameron once again spoke of “the need to rebalance our economy and make sure it’s a North South recovery - manufacturing as well as services.’

So with the Latest GDP statistics indicating that the UK economy is growing more quickly than at any point since the beginning of the financial crisis, it seems a good moment to consider whether our politicians have delivered on their oft-repeated pledge.

It’s fair to say that there have been some promising steps in the right direction.

The launch of the Catapult centres - which are attempting to help promising research find a route to market - represent a welcome investment in the future. Meanwhile, last year’s national infrastructure plan, which details around £375bn of investment in energy, transport, communications, and water projects, is arguably another vote of confidence in the long term benefits of tangible projects.

And, as the latest figures show, there is modest growth in manufacturing. The sector grew by 0.9 per cent in last three months of 2013 – its strongest growth for three years. And the UK’s automotive sector (led by firms like Jaguar Land Rover and Nissan) is in particularly rude health. For the first time since the late 1970s we now export more vehicles than we import. We produced 1.5 million vehicles last year, the highest volume since 2007, and the industry looks set to become the third largest car maker in Europe. Not bad considering it was on its knees just over a decade ago.

The UK’s manufacturing growth has been spearheaded by the likes of Jaguar Land Rover

But whilst this is all promising stuff, its impact on the wider economy is limited. Indeed, as the latest figures illustrate, the UK’s surprising economic recovery is being driven largely by a growth in consumer spending and revival in the housing market. Not quite the recipe for a sustainable recovery.

What’s more, whilst there has been a fall in unemployment and growth in the number of jobs, figures from the Office of National Statistics suggest that employment is rising more rapidly than output. One implication of this is that productivity is falling. Again, hardly a recipe for a sustainable recovery.

And while many in Westminster have hailed the latest figures as evidence that their economic policy is working, fears over the fragility of the recovery are being voiced at the highest levels of government. Much to his conservative colleagues’ annoyance, business secretary Vince Cable this week chose the evening before the publication of the GDP figure to claim that the recovery could be “short-lived” and warn of a return to “boom and bust”.

Any growth at all is not to be sniffed at, and as we’ve frequently reported, there are plenty of positive signs that engineering and manufacturing are on an upward trajectory.

But there’s a disturbingly familiar shape to Britain’s current growth – and we’re currently a long way from the kind of sustainable balanced economy that you could confidently bet on weathering a repeat of the financial storms that we’ve just sailed out of.

Readers' comments
(13)

Mike | 29 Jan 2014 12:09 pm

As the economy will be in the hole to the tune of 1.4 trillion in 2015 (and that's just government borrowing alone) it would take about 5 years if everyone was taxed at 100% to pay it off. It does not take in to account massive personal debts!

I think the continued demand (by engineers and manufactures to rebalance the economy from Financial services to manufacturing hides the issues partially alluded to partially of low productivity but also that a sizeable number of manufacturers and industries are probably quite old unproductive companies who are only still here due to very low interest rates.

In the past these companies and even whole industries would have gone to the wall (painfully – but arguably for the better in the long run). Eventually those industries may have been replaced (horse driven coaches?) often by services, or at least significantly shaken up (Steam engines to steam turbines).

Living in a more modern age we perhaps need to work out how to make that transition confidently and not always rely on the government to do it. Also beware of SME’s pleading for special treatment – who are really just not innovative and limping on-due to low interest rates- from the ones who really could lead to new industries.

As long as we, the public, elect MPs who do not have a clue as to how a successful business economy works, the longer they will continue to ignore or mislead the country. Yet again we are seeing the promises of more pay and more support for those who vote in particular way, the chances of climbing out of this unholy mess becomes more remote. The public has got to understand, there is no magic wand and that all the hot air in parliament goes nowhere except upwards and outwards to be lost in space.

Any form of economic growth in the economy increases wealth and is good for both the people directly affected as well as the economy and people in general as the growth results in increased tax receipts that can be used to reduce the deficit further and/or reduce the required spending cuts to come and/or increase spending where increased spending is needed and/or reduce taxation or a mixture of all 4.

I work in manufacturing and have done so for almost 40 years since graduating and realise the simple truth that to succeed in business you have to:-

1) Produce a Product or Service that the market requires

2) With the performance and reliability the market demands

And;

3) At a price the market is prepared to pay

If you do your business will sell its Products or Services and your business will grow and expand at the expense of its competitors market share until it becomes a monopoly and if you don’t your business will shrink and disappear.

The economy will only rebalance to manufacturing when more of UK’s manufacturing base makes products the market demands with the performance and reliability the market demands at a price the market is prepared to pay – Until then the UK consumer will continue to buy imported manufactures!!!!

We as consumers have to have more loyalty to British manufactured goods the way the French and Germans do to French and German manufactured goods instead of a perverse belief that the UK consumer seems to have that UK manufactured goods are inferior to imported manufactured goods.

As Engineers we must ensure that our employer’s products are what the market requires with the performance and reliability the market demands manufactured at a price the market is prepared to pay and with the profit margin required to pay good dividends to our shareholders, invest in the business, invest in R&D, invest in continuous improvement and develop new products that the market will require in future as well as paying everyone in manufacturing the wages they think they deserve – Including the Engineers whose responsibility it is to design the products that the market requires with the performance and reliability the market demands as well as the Manufacturing Engineers whose responsibility is to manufacture the products with the quality the market demands at the price the market is prepared to pay with the profit margin necessary to reward shareholders and workers as well as investing (R&D, New Products and capital investment) in the business.

The Government can’t rebalance the economy, no government can – Government can only make the conditions right for investment and employment – Like it or not, that means low energy costs, low taxation, good allowances for investment and R&D on the one hand and a light regulatory touch on the other. We can see how not to do it in France at present and we can see how German regional banks take the long view in supporting regional German business like traditional British banks used to before they became large banks with the investment arms taking over. We need to develop banks interested long term investment in manufacturing industry the way we used to and how German Regional banks do. I know several small business owners who turn work away and are not expanding like they should and who could expand their business but aren’t because they don’t have access to the money they need to finance the manufacture of equipment they can sell. In each case I have suggested they try cloud funding borrowing money direct from small investors willing to invest directly in a business’s order book – Short term loans which are taken out to finance an order when an order is taken and paid back when ‘bespoke’ goods are shipped and paid for.

In a generally pessimistic article one phrase caught my attention, IE. "....Office of National Statistics suggest that employment is rising more rapidly than output...". To increase output one must first generally increase the number of employees to make the products to increase output etc. etc. ad infinitum..... For the author to suggest "One implication of this is that productivity is falling" is just nonsense.

Productivity was already down compared to pre-recession levels, while employment during the downturn didn't fall by as much as expected, often due to staff agreeing to pay cuts in place of redundancies. As a result, economists believe there has been substantial spare capacity in the economy in the last few years. This means we should be able to increase output without creating jobs.

Doing the opposite - while welcome for those people who are now employed - means the UK's productivity is getting even worse, which isn't good for attempts to reverse the decline in real wages or living standards.

Barry Gouldbourne | 29 Jan 2014 3:56 pm

Sustained economic growth can not be achieved by UK manufacturing until Companies have access to liquid capital not based only on the value of all their directors' assets. This is certainly not the case today when companies soon run out of capital in any surge in demand, as soon as the start lending it to their customers in the form of credit. This starving of cash stops their buying ability and their production has to slow down. We can see it all the time 2 months of go then two months of stop. I do not know how new businesses survive.There is a saying in the West Country, " How to make 1 million in farming ?Start with two." That's what we need in Manufacturing.This is to say nothing on how you purchase expensive Capital Equipment to make yourself competitive. When I started a chat to your personal bank manager or Finance Company and 100k was delivered next week.

If you have some millions to invest, where are you going to put it?Into risky development of new products and technologies? Or into existing assets like land and property, where you know what you're getting, and roughly how much it will be worth next week.The same is true for quantitative easing money. It too flows mostly into existing assets, inflating the values of property and commodities. Bubble and bust will be the result.To invest well in manufacturing requires more specialist knowledge and research. Maybe it doesn't happen enough in the UK because the people in charge of the money here seldom have technical backgrounds?If so then we're trapped in a catch 22 situation. No wonder our industries are being bought up by foreign capital. If the government truly recognised the real source of wealth (as opposed to money) then they would tax speculation in order to direct capital towards productive industry where it belongs.My unproven suspicion is that the UK's speculation 'industry' is so good at appropriating the world's wealth that the government can't or won't disturb it. I think that the EU can see this: they will attempt to impose credit controls and/or fiscal union of some kind. And our bigwigs will pull us out and attempt to ride the gravy train for as long as they can, until we are excluded and then outcompeted by those nations that still make stuff.

Mike is concerned about government borrowing. I am far more concerned about the trade gap. The deficit summed up for the years 2000 to 2012 totals 31% of GDP. There are various tricks the government can play to balance its books not least reducing the cost of borrowing by setting interest rates low. The trade gap can only be financed by asset sales or exporting more / importing less. Why it is not more of a political concern I have no idea. I remember one of Thatcher's ministers saying, as great swathes of manufacturing industry closed down, that the balance of payments is not a problem as long as we can finance it. Well it can't be financed by endless borrowing and our political representatives must understand that stuff needs to be made before it can mysteriously turn up in John Lewis for them to buy.

I know who all the new jobs have gone to. They are the people illegally calling me several times everyday to persuading me to reclaim the mis-sold PPI that I was never daft enough to pay in the first place.